US digital asset disputes updater: exploring the latest cases, regulatory developments, and legal trends

Key Takeaways:

• SEC dealer rule vacated by Northern District of Texas judge
• CFPB issues final rule excluding crypto from market participants definition
• Lido DAO members not immune to suit under partnership law 
• Caitlyn Jenner sued for crypto promotion by investors

SEC Dealer Rule Vacated in Northern District of Texas

Judge Reed O’Connor of the Northern District of Texas in Fort Worth recently vacated the SEC’s dealer rule. The SEC’s dealer rule was finalized in February of this year, expanding the definition of “as part of a regular business” pursuant to Sections 3(a)(5) and 3(a)(44) of the Securities Exchange Act. Under the rule, liquidity providers could be considered “dealers” and therefore required to registered—with the SEC making a broad gesture toward crypto falling under the ambits of the rule.

Insight: Although Judge O’Connor vacated the dealer rule in National Association of Private Fund Managers v. SEC, he also issued a ruling in Crypto Freedom Alliance of Texas v. SEC referring back to his decision in National Association of Private Fund Managers. At the core of their argument, Crypto Freedom Alliance and BA contended that there was no required economic analysis with respect to cryptocurrencies, and as such, the rulemaking was not properly transparent under the APA. Judge O’Connor concurred, explaining that ““[t]he Rule as it currently stands de facto removes the distinction between ‘trader’ and ‘dealer’ as they have commonly been defined for nearly 100 years.”

CFPB Issues Its Final Rule Excluding Crypto from “Market Participants” Definition

The CFP has issued its final rule regarding the definition of larger market participations—and has specifically excluded crypto from the ambits of the Consumer Financial Protection Act. The rule as proposed would have implicated crypto in terms of funds transfers, potentially also reaching crypto wallets. The proposed rule was met with pushback, likely resulting in this final rule.

Insight: The final rule explicitly provides that “[a]fter considering comments on the inclusion of certain digital assets transactions in the proposed definition of ‘consumer payment transaction,’ the CFPB has decided, for purposes of this Final Rule, to exclude such transactions from coverage under the Rule.” To that end, this final rule raises an interesting question concerning the meaning of “funds” within the context of the CFPB’s general regulatory frameworks. Does this rule then mean that Regulation E’s definition of “funds” excludes cryptocurrencies too?

Lido DAO Members Not Immune to Suit Under Partnership Law

Lido DAO, a decentralized autonomous organization, was recently found to be capable of being sued. Investors in Lido DAO’s token (“LDO tokens”) sued over losses from the token purchased through secondary marketplaces. Overall, there were several issues presented and addressed by this holding: (1) whether Lido DAO could be sued, (2) whether LDO tokens were unregistered securities, and (3) secondary market transactions for tokens under Section 12(a).

Insight: Critical to note first is that the opinion issued in this case only denied motions to dismiss, so more substantive issues remain. However, the holding in this case nevertheless presents an approach to DAOs that puts members on notice as to their status as a legal entity. This case also represents a step beyond CFTC v. Ooki DAO, where Ooki DAO was found to be a “person” under the Commodity Exchange Act. To be further explored, too, is how a DAO can be held liable under Section 12(a) of the Securities Act.

Caitlyn Jenner Sued Over Cryptocurrency Promotion Under Section 12(a) of the Securities Act

Investors in Caitlyn Jenner’s ‘$JENNER’ token have sued Jenner over her promotion of her cryptocurrency. The investors’ suit alleges liability under Section 12(a) of the Securities Act, among other claims. Core to the idea of this lawsuit is that Jenner herself used social media to promote her eponymous cryptocurrency. Undertaking a Howey analysis, plaintiffs make the case that $JENNER is an unregistered security under Section 5.

Insight: This case—and the many others we have noted of recent—displays the importance of litigation under Section 12(a) of the Securities Act with respect to cryptocurrency. Just as the Lido DAO litigation above, Jenner’s posting on social media is one of the main hooks for Section 12(a) liability as alleged by the plaintiffs. As alleged in the complaint, Jenner “consistently and repeatedly solicited investors” through social media and obtained a benefit from these solicitations. The case itself is not as complex as some others, but nevertheless will prompt the court—if not settled—to probe the logic of Section 12(a) solicitation further.

The Mempool: Noteworthy Reads:

• Blockchains Examined: Ethereum researcher Vlad Zamfir explores the purpose of blockchain technology in a recent CoinDesk opinion piece. The letter is part-philosophical exploration, part-call to action, but is entirely sensible: as Zamfir explains, we need to “remember that blockchains, as universal timekeepers, can do so much more.”
• Confidential ERC-20 Framework Whitepaper: Circle and Inco Network co-authored a whitepaper introducing the Confidential ERC-20 Framework, allowing ERC-20 tokens to be wrapped into confidential versions of themselves for privacy purposes. This model presents an interesting approach to compliant privacy.
• IRS 1099-DA Comment Letter: The Crypto Council for Innovation recently submitted a comment letter on the IRS’ Form 1099-DA. CCI recommends an extension to file this form, and urges the IRS to create dedicated sections for NFT and qualifying stablecoin reporting, among other items.

If you have any questions about these developments or your own digital asset-related litigation matters, please contact NRF Digital Asset Disputes Partner Eric Martin or Associate Gage Raju-Salicki to set up some time to discuss your questions.